WFC - Wells Fargo

[redskin]

There was a time when almost every numbnuts on here would have paid book value as a hugely, cheap discount price for Wells Fargo.  I never owned it then.  The only big bank I've owned over the last 12 years has been all of the BAC I bought at $5 back in 2008, some more at $13 and finally we bought quite a bit this year at $19.  I owned some Wells Fargo in 2008 when I bought it at $13 and sold a couple of years later at $27.  I have not bought Wells till this March.

 

Buffett says that the markets are a voting machine in the short-term and a weighing machine in the long-term.  In the short-term, Wells has been hammered with one scandal after another, one fine after another.  Yet, here we are and they are still the 3rd most dominant U.S. bank after JPM and BAC, and globally less than 15 banks are anywhere near its size.  They are still making money hand over fist with all of these fines and regulatory constraints.  They are still one of the best capitalized in the current scenario and under the most stressful scenarios that the FED can think of.  We are at zero short-term interest rates and they are still making money.  It is trading at 0.6 of book, a price most would say was "outrageous, stupid, plain dirt cheap" if Buffett still held it and there was no scandal around it.  Instead, the Buffett acolytes pour into JPM when Buffett says read Dimon's reports, and when Buffett bails on WFC and buys BAC, the acolytes load up on BAC.

 

Voting machine now.  Don't forget the weighing machine later!  Cheers!

Funny, but true! Everyone wants to pay up when they are a "superior" business, but when they hit some trouble, they don't want to know!

 

Bank of America has done fantastically over the last 10 years in terms of share price, but that's only because it was coming off such a low base. Even before the financial crisis, I don't remember them ever having a greater than 1% return on assets, so what Moynihan achieved was just extraordinary. The issue I see is that the turnaround here is now complete, and in today's hyper competitive, low interest rate environment, I really struggle to see how a large money center operation like Bank of America can generate much beyond its current ~1% ROA. I still think it's cheap enough that it will do well against the broader market. I would anticipate a return over the next decade of about 11-12% (assuming the regulatory environment stays constant). Nothing to be sneezed at when Vanguard are forecasting a 3-5% return in US equities.

 

Wells on the other than trades at a much steeper discount to book. While it has issues, it is in a much better condition than what Moynihan took all those years ago when many thought BAC wouldn't even survive. I think they have the right CEO in charge, and I think in the long term the problems will be fixed and that the business should stabilise at a 1% ROA, similar to JPM or BAC. It had better returns than this in the past, but I wouldn't even bake that into my estimates going forward. Hopefully Scharf is the right man for the job and he can get a 10 year run at it, like Moynihan got. If he can just get this thing return a 1% ROA/10% ROE, my numbers have Wells giving something more like a 15-16% return over the next 10 years.

 

None of this answers why Buffett sold, quite frankly, I have no idea why he did this. Perhaps he's just had enough of Wells and its constant issues, perhaps the company has become tainted in his eyes, perhaps he is fed up having to intervene (did he not approve Tim Sloan for the top job behind the scenes?), perhaps he doesn't like it because it's no longer a wonderful business? People seem to forget that Buffett does make mistakes (and probably increasingly so in the last few years). I seem to remember him selling a chunk of Moodys at the bottom of the financial crisis, it's 10 bagged from there. He's also recently invested in mistakes like IBM, Kraft, Seritage, Occidental, Precision, etc. I think Wells can still do ok even after Buffett has sold.

 

Leading up to the financial crisis, BAC's ROA was 1.3-1.45%.

[A_Hamilton]

There was a time when almost every numbnuts on here would have paid book value as a hugely, cheap discount price for Wells Fargo.  I never owned it then.  The only big bank I've owned over the last 12 years has been all of the BAC I bought at $5 back in 2008, some more at $13 and finally we bought quite a bit this year at $19.  I owned some Wells Fargo in 2008 when I bought it at $13 and sold a couple of years later at $27.  I have not bought Wells till this March.

 

Buffett says that the markets are a voting machine in the short-term and a weighing machine in the long-term.  In the short-term, Wells has been hammered with one scandal after another, one fine after another.  Yet, here we are and they are still the 3rd most dominant U.S. bank after JPM and BAC, and globally less than 15 banks are anywhere near its size.  They are still making money hand over fist with all of these fines and regulatory constraints.  They are still one of the best capitalized in the current scenario and under the most stressful scenarios that the FED can think of.  We are at zero short-term interest rates and they are still making money.  It is trading at 0.6 of book, a price most would say was "outrageous, stupid, plain dirt cheap" if Buffett still held it and there was no scandal around it.  Instead, the Buffett acolytes pour into JPM when Buffett says read Dimon's reports, and when Buffett bails on WFC and buys BAC, the acolytes load up on BAC.

 

Voting machine now.  Don't forget the weighing machine later!  Cheers!

Funny, but true! Everyone wants to pay up when they are a "superior" business, but when they hit some trouble, they don't want to know!

 

Bank of America has done fantastically over the last 10 years in terms of share price, but that's only because it was coming off such a low base. Even before the financial crisis, I don't remember them ever having a greater than 1% return on assets, so what Moynihan achieved was just extraordinary. The issue I see is that the turnaround here is now complete, and in today's hyper competitive, low interest rate environment, I really struggle to see how a large money center operation like Bank of America can generate much beyond its current ~1% ROA. I still think it's cheap enough that it will do well against the broader market. I would anticipate a return over the next decade of about 11-12% (assuming the regulatory environment stays constant). Nothing to be sneezed at when Vanguard are forecasting a 3-5% return in US equities.

 

Wells on the other than trades at a much steeper discount to book. While it has issues, it is in a much better condition than what Moynihan took all those years ago when many thought BAC wouldn't even survive. I think they have the right CEO in charge, and I think in the long term the problems will be fixed and that the business should stabilise at a 1% ROA, similar to JPM or BAC. It had better returns than this in the past, but I wouldn't even bake that into my estimates going forward. Hopefully Scharf is the right man for the job and he can get a 10 year run at it, like Moynihan got. If he can just get this thing return a 1% ROA/10% ROE, my numbers have Wells giving something more like a 15-16% return over the next 10 years.

 

None of this answers why Buffett sold, quite frankly, I have no idea why he did this. Perhaps he's just had enough of Wells and its constant issues, perhaps the company has become tainted in his eyes, perhaps he is fed up having to intervene (did he not approve Tim Sloan for the top job behind the scenes?), perhaps he doesn't like it because it's no longer a wonderful business? People seem to forget that Buffett does make mistakes (and probably increasingly so in the last few years). I seem to remember him selling a chunk of Moodys at the bottom of the financial crisis, it's 10 bagged from there. He's also recently invested in mistakes like IBM, Kraft, Seritage, Occidental, Precision, etc. I think Wells can still do ok even after Buffett has sold.

 

Leading up to the financial crisis, BAC's ROA was 1.3-1.45%.

 

Leverage was also 40-50% higher.

[Parsad]

To all the people who keep asking about macro issues like interest rates and regulatory issues, don’t all those things affect the banks more or less equally?

 

Sure some investment bank operations may benefit, (big if) but I could point to a whole bunch of other activities that the Fed is engaging in that would for instance depress bond trading revenues.

 

If Wells is already trading at a valuation consistent with other global banks in low or negative interest rate environments, then won’t Wells do relatively better than the other large US banks which are trading like interest rates are still higher?

 

In other words, regardless of your view of the direction of interest rates, Wells is a better value than it’s most direct competitors.

 

Common sense isn't so common.  Nice post Broeb22!  Cheers!

[Ballinvarosig Investors]

1.) interest rates over the next 10 years, especially the potential for negative interest rates?

I fully expect negative rates at some point, which will undoubtedly hit interest earnings. However, I think what the banks lose on the interest side, they are going to make back on the fees. In Europe where we already have negative rates, a lot of services that would have been provided for free or as loss leaders to get people through the door to sell loans are being stopped. No customer will accept a negative interest rate, but they will have to accept fees if the bank isn't making enough on the loans.

2.) business diversification

I don't really care about business diversification. I would rather see Wells stick to their knitting, it's not like they don't have enough on their hands already to improve the situation there.

[Broeb22]

 

Leading up to the financial crisis, BAC's ROA was 1.3-1.45%.

 

Leverage was also 40-50% higher.

 

Just a friendly reminder that leverage would impact ROE but would not impact ROA, unless we're redefining the word leverage.

[A_Hamilton]

 

Leading up to the financial crisis, BAC's ROA was 1.3-1.45%.

 

Leverage was also 40-50% higher.

 

Just a friendly reminder that leverage would impact ROE but would not impact ROA, unless we're redefining the word leverage.

 

No. It impacts ROA as well. You are leveraging opex.

 

If it helps, think about what ROA is at wells at current leverage (back out provisions for this year), and then what it would be at 1x leverage. Obviously ROA would be lower for WFC at 1x then at 5x, 10x, 15x, all else equal.

[coc]

No. It impacts ROA as well. You are leveraging opex.

 

If it helps, think about what ROA is at wells at current leverage (back out provisions for this year), and then what it would be at 1x leverage. Obviously ROA would be lower for WFC at 1x then at 5x, 10x, 15x, all else equal.

 

Would it? If Wells replaced all of their long-term debt with equity, leverage would decline to 5x, interest income would stay the same (you're simply reshuffling the financing side of the balance sheet), but interest expense would decline quite a bit due to lack of interest on the debt - pushing ROA up, not down.

 

I'm not sure it's a simple equation either way.

[Broeb22]

 

Leading up to the financial crisis, BAC's ROA was 1.3-1.45%.

 

Leverage was also 40-50% higher.

 

Just a friendly reminder that leverage would impact ROE but would not impact ROA, unless we're redefining the word leverage.

 

No. It impacts ROA as well. You are leveraging opex.

 

If it helps, think about what ROA is at wells at current leverage (back out provisions for this year), and then what it would be at 1x leverage. Obviously ROA would be lower for WFC at 1x then at 5x, 10x, 15x, all else equal.

 

So you're saying operating leverage was 40-50% higher? What exactly does that mean? Does that mean their incremental margin was 50% higher pre-GFC, as in if their incremental margin is 20% right now that it was 30% pre-GFC? This is getting a little technical for my simpleton brain.

 

[LearningMachine]

No. It impacts ROA as well. You are leveraging opex.

 

If it helps, think about what ROA is at wells at current leverage (back out provisions for this year), and then what it would be at 1x leverage. Obviously ROA would be lower for WFC at 1x then at 5x, 10x, 15x, all else equal.

 

Would it? If Wells replaced all of their long-term debt with equity, leverage would decline to 5x, interest income would stay the same (you're simply reshuffling the financing side of the balance sheet), but interest expense would decline quite a bit due to lack of interest on the debt - pushing ROA up, not down.

 

I'm not sure it's a simple equation either way.

 

Indeed, ROA would go up with lower leverage.  Another way to look at it would be to say lets dial the leverage all the way down to no leverage.  So, WFC takes all of its $133 Billion of CET1 capital and invests it directly in Government guaranteed mortgages at a small headoffice and reduces all operating expenditures needed today for $1.215 Trillion of RWA.  No more industry-specific lending departments, no more industry-specific collection departments, no more bank branches to feed, no more bank tellers to pay, no more utilities to pay, minimal employees to pay in general.  ROA will go up in that case on that $133 Billion of CET1.

 

All that said, impact of leverage changes is much much higher on ROE than ROA.  So, kind of a less important conversation to have on how much leverage impacts ROA.

[coc]

All that said, impact of leverage changes is much much higher on ROE than ROA.  So, kind of a less important conversation to have on how much leverage impacts ROA.

 

This is exactly right.

[Parsad]

 

Leading up to the financial crisis, BAC's ROA was 1.3-1.45%.

 

Leverage was also 40-50% higher.

 

Just a friendly reminder that leverage would impact ROE but would not impact ROA, unless we're redefining the word leverage.

 

No. It impacts ROA as well. You are leveraging opex.

 

If it helps, think about what ROA is at wells at current leverage (back out provisions for this year), and then what it would be at 1x leverage. Obviously ROA would be lower for WFC at 1x then at 5x, 10x, 15x, all else equal.

 

So you're saying operating leverage was 40-50% higher? What exactly does that mean? Does that mean their incremental margin was 50% higher pre-GFC, as in if their incremental margin is 20% right now that it was 30% pre-GFC? This is getting a little technical for my simpleton brain.

 

Yes.  Most banks were operating with visible leverage of 10-12-14 to 1, but when you included collateralized debt or CDO obligations, the leverage jumped to 20-30 to 1...for someone like AIG, Countrywide, New Century...it jumped to 80-100 to 1.  So while the banks had somewhat higher asset to equity and debt to equity leverage, the quality of their underlying portfolio was far worse as the housing market turned.  Things were great until they weren't great!

 

Today, U.S. banks declared leverage is relatively close to the actual underlying leverage of their portfolios.  Some are starting to turn to new products that are a bit funny, but for the most part, they are sticking to actual banking...lending, borrowing, credit, investment banking, commercial lending and wealth management.  And the government has them better capitalized and limited their ability to use derivatives.  Hard to start padding bonuses through risky banking practices, when you have so many eyes on you and such expansive stress testing.  Trump could f**k that up if he deregulates too much in a potential 2nd term!  Cheers!

[oldye]

Numbnuts here, not saying this isn't priced in but just going to leave this here

 

https://www.federalreserve.gov/releases/g19/current/default.htm

 

It also looks like all the new deposits created in q2 are not sticky after all and healthy consumers are paying their high interest debt back as fast as humanly possible.

Average rates on outstanding credit card balances were down 10% last I checked too so double whammy.

 

If there is another stimulus, it will only accelerate the trend in my opinion

[wabuffo]

Let's see what Munger does at DJCO. If he keeps the WFC position that further makes the Buffett sale irrelevant.

 

Munger stands pat.

 

https://www.sec.gov/Archives/edgar/data/783412/000143774920020848/xslForm13F_X01/rdgit100620.xml

 

wabuffo

[Parsad]

Let's see what Munger does at DJCO. If he keeps the WFC position that further makes the Buffett sale irrelevant.

 

Munger stands pat.

 

https://www.sec.gov/Archives/edgar/data/783412/000143774920020848/xslForm13F_X01/rdgit100620.xml

 

wabuffo

 

Charlie also thinks banks will do very well going forward, as 99% of the assets are in banks.  Cheers!

[wabuffo]

Charlie also thinks banks will do very well going forward, as 99% of the assets are in banks.  Cheers!

 

Don't forget he also owns BYD on the Hong Kong exchange and Hyundai Pfd 3 on the Korean exchange. Only US-listed stocks are on DJCO's 13F-HR.  But your point still stands as banks are 60% of the total portfolio assets.

 

wabuffo

[coc]

Charlie also thinks banks will do very well going forward, as 99% of the assets are in banks.  Cheers!

 

Don't forget he also owns BYD on the Hong Kong exchange and Hyundai Pfd 3 on the Korean exchange. Only US-listed stocks are on DJCO's 13F-HR.  But your point still stands as banks are 60% of the total portfolio assets.

 

wabuffo

 

Yeah and actually if you run it forward to today, probably less than half of the assets are banks. BYD has skyrocketed. It may be close to a ~$100M position right now, as much as the banks combined. Again, at today's prices.

 

Obviously Charlie is not seriously worried about the banks if he didn't touch them - but it's interesting how the portfolio has re-shaped this year.

[wabuffo]

Yeah and actually if you run it forward to today, probably less than half of the assets are banks.

 

Good call.  I hadn't updated the DJCO portfolio prices in a while so I did a real-time status update.  Banks are now at 49% of the total portfolio.  And indeed, BYD is close to a $100m position (almost matching the banks total FMV at $103m).

 

 

i hadn't realized BYD has run up so much.  BRK Energy owns 225m shares which would now be worth $3.7b.  That would put BYD in the top 10 among BRK equity holdings.

 

wabuffo

[Parsad]

Let's see what Munger does at DJCO. If he keeps the WFC position that further makes the Buffett sale irrelevant.

 

Munger stands pat.

 

https://www.sec.gov/Archives/edgar/data/783412/000143774920020848/xslForm13F_X01/rdgit100620.xml

 

wabuffo

 

Charlie also thinks banks will do very well going forward, as 99% of the assets are in banks.  Cheers!

 

Sorry, I should have phrased that as 99% of U.S. assets are in banks.  He loved Costco, but they've sold their position in that, while holding the banks.  Cheers!

[wabuffo]

Sorry, I should have phrased that as 99% of U.S. assets are in banks.  He loved Costco, but they've sold their position in that, while holding the banks.  Cheers!

 

I'm confused.  Are you saying DJCO held Costco within their portfolio at some point?  Are you confusing Costco with Posco, perhaps?  Most of Posco got sold a while back.

 

Because DJCO has never owned Costco within their portfolio.

 

wabuffo

[Parsad]

Yeah and actually if you run it forward to today, probably less than half of the assets are banks.

 

Good call.  I hadn't updated the DJCO portfolio prices in a while so I did a real-time status update.  Banks are now at 49% of the total portfolio.  And indeed, BYD is close to a $100m position (almost matching the banks total FMV at $103m).

 

 

i hadn't realized BYD has run up so much.  BRK Energy owns 225m shares which would now be worth $3.7b.  That would put BYD in the top 10 among BRK equity holdings.

 

wabuffo

 

Sorry, I should have phrased that as 99% of U.S. assets are in banks.  He loved Costco, but they've sold their position in that, while holding the banks.  Cheers!

 

I'm confused.  Are you saying DJCO held Costco within their portfolio at some point?  Are you confusing Costco with Posco, perhaps?  Most of Posco got sold a while back.

 

Because DJCO has never owned Costco within their portfolio.

 

wabuffo

 

Wabuffo, I thought I remembered when Charlie moved the whole portfolio from T-bills into WFC, BAC and COST during the financial crisis in 2009.  A few years later, the portfolio had gone from like $30M to $80M.  Was it not COST...what was the 3rd stock then?

 

Today, Daily Journal is probably one of the best capitalized media business' with over $200M in investments.  Maybe Buffett should have done this with the Washington Post Company.  Cheers!

[wabuffo]

Wabuffo, I thought I remembered when Charlie moved the whole portfolio from T-bills into WFC, BAC and COST during the financial crisis in 2009.

 

Parsad, I think what you might be remembering was Charlie buying three marketable securities during 2009 - 2 stocks and 1 bond (and not 3 stocks). 

 

During the March Q, he bought WFC and a bit of USB pretty much at the lows which he has held onto to-date.

 

Then in the June Q, he didn't buy a stock, he bought a newly issued bond.  DJCO's SEC reports never disclosed which bond he bought, but I think he bought Altria's 10.2% due 2039 (CUSIP 02209SAH6). 

 

Of course, as interest rates fell, this bond's price rose to a high of around $185 in late 2016.  This probably got Charlie thinking about an exit.  Charlie sold it during the March Q of 2018 at ~$165 (Charlie bought it a bit under $100 par) right after Federal corporate tax rate got cut perhaps motivated by the reduction in tax rates and his desire not to hold it to maturity and redemption.

 

So you are correct that Charlie bought 3 securities in 2009 and sold 1 recently.  But Costco common was not one of these 3.  As you can see, I've spent waaayyyyy too much time figuring out DJCO's investments.

 

I hope this helps.

 

wabuffo

 

[coc]

Altria's 10.2% due 2039 (CUSIP 02209SAH6)

 

Without asking you to re-do all of your legwork, what made you think this was the bond? Thanks!

[wabuffo]

Without asking you to re-do all of your legwork, what made you think this was the bond? Thanks!

 

Its been a while - I think I attempted to figure out the bond in 2013.  But IIRC, my process was roughly along these lines:

 

1) I took the annual dividend and interest income line from the income statement and subtracted the known annual dividends from WFC, USB (which were the only holdings in the early years) plus an estimate of interest from the quarterly average holdings of T-Bills.  I kept coming to a number around $500k per year in interest income from the bond.

 

2) I then searched for bonds issued in 2009 with a yield of ~10%  (since Munger spent $5m and was earning $500k annual interest).

 

3) I narrowed the list to one bond - the Altria 10.2% due 2039.  I knew Munger would want absolute safety in terms of yield and Altria provides that safety because of its cash flows.

 

4) Finally, I plotted the quarterly marks for the bonds from the 10-Qs, 10-Ks against some bond pricing data from FINRA's database (plus a couple of other sources).  Bond pricing is definitely more opaque than large cap equity pricing - but the bond price at quarter end roughly matched where DJCO was marking the bonds.

 

I must admit that I haven't really looked back at my work since then.  Of course, I could be wrong but the circumstantial evidence seems to be there. 

 

Circumstantial evidence was all I had when I first discovered Munger bought WFC (and USB) the weekend that the 10-Q came out in May, 2009.  But like I said earlier, I've spent too much time on the DJCO portfolio.

 

wabuffo

[coc]

Very interesting - good legwork!

[Parsad]

Wabuffo, I thought I remembered when Charlie moved the whole portfolio from T-bills into WFC, BAC and COST during the financial crisis in 2009.

 

Parsad, I think what you might be remembering was Charlie buying three marketable securities during 2009 - 2 stocks and 1 bond (and not 3 stocks). 

 

During the March Q, he bought WFC and a bit of USB pretty much at the lows which he has held onto to-date.

 

Then in the June Q, he didn't buy a stock, he bought a newly issued bond.  DJCO's SEC reports never disclosed which bond he bought, but I think he bought Altria's 10.2% due 2039 (CUSIP 02209SAH6). 

 

Of course, as interest rates fell, this bond's price rose to a high of around $185 in late 2016.  This probably got Charlie thinking about an exit.  Charlie sold it during the March Q of 2018 at ~$165 (Charlie bought it a bit under $100 par) right after Federal corporate tax rate got cut perhaps motivated by the reduction in tax rates and his desire not to hold it to maturity and redemption.

 

So you are correct that Charlie bought 3 securities in 2009 and sold 1 recently.  But Costco common was not one of these 3.  As you can see, I've spent waaayyyyy too much time figuring out DJCO's investments.

 

I hope this helps.

 

wabuffo

 

 

From what I remember at least two of the stocks were BAC and WFC...USB and the bond were maybe in there, but I'm certain BAC and WFC were two of the securities.  It's been 11 years!  Cheers!